Why All Investors Should Understand the Gross Rent Multiplier

by | BiggerPockets.com

The gross rent multiplier (GRM) is a ratio of property value to income for buy and hold investments. That’s it. It’s the simplest equation in investing. While there is a lot the GRM doesn’t take into account, it does allow you to quickly and easily decide if you should spend more time looking into the property or pass it up.

If you analyze every property that comes up, you’ll burn out and miss opportunities that require quick action. One of the most important thing you can do in investing is learn a few time-saving shortcuts like GRM and cap rates to weed out bad deals. The more efficient you are, the better you’ll be at investing.

“The difference between successful people and really successful people is that really successful people say no to almost everything.” — Warren Buffett

That’s the purpose of the GRM. Saying no.

Related: Gross Rent Multiplier – Techniques to Speed Up Your Decision Making, Part II

The Equation

GRM = Value of Property/Annual Gross Income

Alternatively, you can estimate the value of a property using the same equation.

Value of Property = GRM x Annual Gross Income

The GRM for any area, type of property or point in time is dynamic because income and property values are dynamic. There are no hard and fast rules with GRM, and the only way to know what to expect is to gather local data and calculate it. While understanding GRM will save you a lot of time and effort down the road, I guarantee you few people will go through the effort to figuring it out. That’s where you can shine.

“Thinking is the hardest work there is, which is why so few people do it.” — Henry Ford

How Do You Determine GRM For Your Area?

Find the average annual rents for specific properties you want to invest in. Don’t use the rents you think are possible or even the rents you want. Average rents are best for this calculation.

Find the sales prices for those properties. You can do this online using local tax records. If you don’t know where to find the records, call a real estate agent. They will be able to access all of that information for you.

If the above data came from recent sales on properties you want to invest in, then you can expect a GRM in the high 13s. Is that good?

No. The lower the GRM, the better the value. A GRM in the high 13s, using the current interest rate of ~4% and 100% financing, would mean breaking even on the mortgage. When you include vacancies and repairs, you are going to lose money over the year. In general I would suggest trying for a GRM of less than 10 to cover all of your costs and come out ahead.

Related: 3 Important Factors When Considering A Market for Real Estate Investment

Notes on Using GRMs

When I see a GRM that is better than average, the first thing I do is look for something wrong. When someone sells a property, you can bet they want the best price. I’ve never met a seller who didn’t. It’s not in our nature to lose money. So, keep you eyes out for deferred maintenance, un-permitted work and hidden defects when the GRM seems too good.

The GRM is an oversimplified equation that can save you a lot of time and effort. 

Investors: Do you use GRM calculations to roughly evaluate your properties?

Let me know with a comment!

About Author

Brett Lee

Brett Lee is a licensed Real Estate Broker in Portland Oregon where he helps people achieve a better future so they can do the things that truly make them happy. Brett is also a buy-and-hold investor, property manager and investment advisor.


    • Brett Lee

      You can use GRM for any type of property. If you want to buy single family homes in a particular neighborhood then run the numbers like the above example and find out what GRM other people are paying for those houses. If one comes up for sale you will be able to quickly decide if it’s worth your time. If you did the same for multifamily or industrial it would work the same way. Keep in mind that you cannot compare the GRM from one type of property to another type. It only works when you compare to other like properties for a specific area.

  1. Joseph Nguyen

    @Justin, From what I can see & read it seems GRM would be a good screening for a SFR due to the fact that the operating cost for a SF is much more predictable. That is, since GRM doesn’t really account for expenses you kinda have to guesstimate those figures and for SF it should be easier to do that. Regards to your GRM 7.5 in a war zone what I would throw into the expense equation is vacancy factors, property abuse, etc. Just seems like more of a head ache if you ask me.

  2. James Syed

    Excellent post / article on GRM. I used to pay a lot of attention on cap rate, but after joining BP. I realized that GRM was quick screening device.

    I also liked your quotes from Warren Buffet and Henry Ford (two legends).

    Keep learning.

  3. bob bowling

    Just like a cap rate a GRM ONLY reflects the market dynamics. It is foolish to say a 13 GRM is not “good”. If properties are bought at a 13 GRM then that is telling you that the market GRM is 13. It has nothing to do with the “value/profitability” of the property.

  4. Andrea Johnson

    Regarding the formula, GRM = Value of Property/Annual Gross Income, how do you determine the value of the property? Is that the most recent sales price? Its ARV? Comps? In my area, the value is more than likely higher than what somebody paid for it last year, so does the GRM change with the market?

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